2011 Pizza Chain of the Year — Domino’s Pizza

As the pizza category shows its resilience and continues to pick up steam, there is little doubt that Domino’s Pizza has had a heavy hand in igniting the industry-wide turnaround. The company’s bold product revamping and hugely effective advertising platform has drawn the interest of the public and Wall Street alike, and the result has been a renewed enthusiasm in the world of pizza.

Patrick Doyle, chief executive officer of the Ann Arbor, Michigan-based company, says that 2010 will go down in Domino’s history as one of the most important years for the pizza brand.

“It was a breakout year at Domino’s,” he says. “Clearly the domestic side of the business had an extraordinary year. We had phenomenal results.”

The company finished 2010 with a same-store sales increase of 9.9 percent for its U.S. units. International stores, meanwhile, enjoyed a 6.9-percent rise in comps. Sales totaled $6.7 billion.
And those numbers were key drivers that led to Domino’s being named Pizza Today’s Chain of the Year in 2011. This marks the second consecutive time the company has won the award, and the third time overall (2003).

“We were really cheering for 10.0 for the year in December,” Doyle says of the near double-digit growth Domino’s enjoyed last year. “We were about eight pizzas short!”

The stellar financial performance, as Pizza Today reported in last year’s June issue, is a result of the company’s willingness to examine its product line and make changes that resonate with American consumers. According to Doyle, the relationship with customers has been overwhelmingly positive since Domino’s revamped its pizza recipe.

“We have a connection with our consumers better than we’ve ever had, and the feedback we’ve gotten from them … has been absolutely terrific,” he says. “I think people care about this brand more and have more of a connection to this brand than they ever did before.”

Lynn Liddle, executive vice president of communications and investor relations, says the company has also seen renewed enthusiasm from franchisees.

“Our relationship with our franchisees, in general, has been pretty good over the years,” she says. “But I would say it is at a high point. “The most important thing to the franchisees is that they are making money. And the franchisees, at least domestically, made more money this year than they did the year before. So the direction is going the right way.”

After impressing the foodservice sector with a 14.3 percent first-quarter jump in 2010 and 9.9 percent increase overall, one has to ask when things will slow down. Doyle believes Domino’s is in position to continue capitalizing on opportunities that could result in increased market share in the future. He puts it in perspective like this:

“The fact is I just see huge opportunity for this business. This is a brand that, as much success as we’ve had, we only sell about one out of 10 pizzas in the U.S. While our delivery share is a lot higher, this is a really big category. We’re selling 10 percent of those pizzas, so there’s clearly a lot of room to grow.”

Considering that Domino’s has nearly 5,000 stores operating in the United States, how many more markets can the company realistically expect to enter?

“While there are no markets that we’re not in at all, there’s still a lot of room for growth. There are still 1,000 stores that we can build in the U.S. And, there are markets where we are very uncompetitive versus where we should be. We figure that we can deliver to about 65 percent of households in the U.S. today,” says Doyle. “There are some that we will never be able to deliver to because they are in towns that are simply too small, or they’re not even in a town, but that number could get to 75 or 80 percent. So there’s still absolutely room for growth in the U.S.”

Still, one might reason that Domino’s has to slow down at some point. For his part, Doyle does not seem particularly concerned about that. “Is it tough to roll over the kind of results we had in 2010? Sure, but our view is that we’ll continue to grow from here,” he reiterates. “Ninety percent of the people out there who are going to order pizza tonight are going to order from someone other than Domino’s, so I don’t spend a whole lot of time worrying about where we can possibly find growth in the U.S. I think there are a lot of opportunities for us. We’re in this for the long haul.”

As the overall pizza landscape continues to gain momentum, Doyle sees no reason to believe that Domino’s won’t benefit. Plus, the sky is the limit internationally, where the company has grown year-over-year for well over a decade — and, even then, there are vast untapped markets. “It’s nice to see the category start to move again a little bit,” says Doyle. “We hope we helped that. We certainly brought a lot of attention to the category, and I think we’ve helped move some of it.

“And the international side of the business … As fast as it’s been growing, we’ve barely scratched the surface. Probably in 2012, we will open a store somewhere in the world and at that point have more stores outside of the United States than inside of the United States.

We will have more retail sales outside of the United States than inside of the United States. That’s something that, as I look at the growth opportunities globally, the opportunities there are not going to run out in my lifetime. It’s a big world out there and there are a lot of people who want to eat Domino’s Pizza.” That’s, in part, because the company provides a difficult-to-beat value proposition. The new pizza recipe rolled out last year has solidified that footing, claims Doyle.

“We built a new base of business with (the new pizza),” Doyle says. “We continue to see the repeat rates and frequency rates with our consumers that prove that we’re connecting with people, that they like this new pizza. I think the category is, in general and Domino’s in particular, giving good value to consumers again. I think part of the reason we saw the category slow down over the past decade is I think our relative value got a little bit off. So as we see a category giving better value, I think we see the traffic improve across the category.”

Pre-recession, foodservice did not exactly drum up a lot of enthusiasm or respect from Wall Street. In 2010, that changed. Last year, the S&P 500 experienced a 12.8 percent improvement over 2009. By comparison, the S&P Restaurant Index was up 28.7 percent. As impressive as that may be, consider the performance of Domino’s (DPZ), which registered a 90.3-percent gain. Is Domino’s finally getting its full due on Wall Street, or is it still an uphill battle for foodservice? “I don’t think we get all the respect yet that we deserve,” Liddle says. “I think Wall Street needs to make sure that they understand the franchise model, and they’re starting to.

There are a number of big companies that are primarily franchised — IHOP, Applebee’s, us — and I think they’re starting to recognize that companies like this can and should be run with leverage and that that actually makes them a more attractive investment. They’re starting to recognize that. And you see our stock price has most definitely improved. So I think we actually are getting recognized as a really strong consumer brand, a global company and having the right capital structure. And I think that was the stopping point for us in the short term. But I think that has certainly begun to turn very nicely.”

As previously alluded, this kind of multi-faceted turnaround began with an honest evaluation of the company’s menu items. Enter Brandon Solano, vice president of innovation for Domino’s Pizza. It’s his job to ensure the company’s products are in line with consumer demands, and it is no coincidence that 80 percent of the company’s menu offerings have turned over in the past two years since Solano took ownership of that part of the operation. “I think one of the traps QSR restaurants fall into is selling things they want to sell instead of things consumers want to buy,” says Solano. “There’s more choice than ever out there, so you have to make sure you’re selling things that people want to buy instead of just focusing on what you want to make.”

The process of revamping the pizza offerings has been well documented in the pages of Pizza Today, but Domino’s did not stop with an overhaul of its core product. It has since moved on to improving and subsequently highlighting chicken in its national adveristing. “It really came from our desire to improve,” Solano says of the newest campaign focus. “Chicken was one of the things that I first wanted to improve when I got here. I guess I wanted to improve everything. We started working on chicken in 2008. We didn’t do a lot in the ad about ‘Hey, it wasn’t very good,’ and all that, because we didn’t want to overdo that. But it was true. They weren’t very crispy and they didn’t have enough breadth of appeal, so what we wanted to do was make it better. If it could be better, we’re going to make it better.”

That is not always an easy sell to franchisees, whose efforts in the field can sometimes be disrupted by a new process or recipe. “The old expectation was, ‘We’ll do that if it doesn’t cause any operational pain.’ That’s a terrible place to be. You’ll never get anywhere doing that,” says Solano. “We were third in quality behind our two main competitors, so we had a lot of ground to make up. You can’t do that by not doing anything new. Here’s what I tell our operators: ‘I promise to bring you operational complexity, but we’ll make it worth it.’ What you can’t do is operational complexity that’s not worth it. If it’s ever not worth it, we’ll pull it.”

This story went to press days before Domino’s announced its first quarter 2011 earnings, so executives were not able to comment yet on sales of the new and improved chicken offerings. However, spokesperson Chris Brandon said the company is “pleased with the response” it has received to the launch. Meanwhile, Solano was asked what other products may be coming down the pipeline as Domino’s continues to reinvigorate its menu.“What’s next that’s not great?” he asks in return. “There are a few things on our menu still that we’re going to fix.” According to Solano, the difficulty isn’t in identifying which products to overhaul or add to the lineup but, rather, how to support them at the store level once they are implemented.

“You have to look at your menu differently,” he says. “Instead of saying they have to be x percent of the mix, you have to determine if they can be incremental and if you can keep them around. If you can keep them on hand and not have waste, and if they’re incremental, then I want to have them. If we end up in a situation where we have waste at the store level, then that’s bad for everybody and I don’t want to do it.” When asked if the company would be eyeing desserts next, Solano responded by saying that “we probably wouldn’t run a whole window on desserts, but we’ve got some good ones. Dessert is a big part of the dining experience. I think there is an opportunity for plenty more. I think there’s an opportunity for a whole portfolio of desserts.”

Regardless of what Domino’s rolls out, it falls to Russell Weiner to make sure the company promotes it nationally with a message that is on target. Thus far the chief marketing officer, who joined Domino’s in 2008, has had nothing but success witin the category. He has brought an analytical, methodical approach to the company’s marketing and advertising.
“We do a lot of research here,” he says. “All the decisions we make are based on numbers. When we release an offer out there, we don’t just think it’s going to do well — we know it’s going to do well. Because we know our numbers are right, then we know we can spend more time in the ad on building the image.” The numerous studies Domino’s conducted before changing its pizza recipe left Weiner convinced that the research and development crew led by Solano had hit a home run.

“We had done so much testing on it,” he says. “You name a consumer group, and I knew what they thought of it. Our general market people liked it better by a huge degree — by double digits. Our current people liked it better. Heavy users liked it. Light users liked it. Kids liked it. Not that we’re targeting kids, but you certainly want to make sure that as you modernize it with bolder tastes that you don’t alienate them. I was 1,000 percent confident that the product was better, so there was no reason to think that people wouldn’t like it better. The question was, ‘How do you market it?’”

And that was the million dollar question. After all, says Weiner, if the company wanted to go bold by admitting it’s previous pizza wasn’t up to par, well, “there was no going back.” For that reason, Weiner says, “I don’t think the product stuff was a risk. The marketing part was the risk.”

The initial ad Domino’s used to announce the “New & Inspired” pizza registered off the charts in terms of its effectiveness with consumers. One might think this push came from an increase in ad spending, but Weiner says that was not the case.

“Our media budget last year was actually less than it was the year before,” he says. “Our media budget last year was less than Pizza Hut’s and Papa John’s. We didn’t do it with more money, and I think that just shows the power of the message.” The question now is whether the message Domino’s has been pumping out — we’re better than ever, come try us — will run its course soon.

“I don’t think it will,” Weiner says. “Consumers are telling us what to do. We’ll just keep on doing what they’re telling us to do. I feel like consumers are going to help us program our brand forever. We’ve just got to stay true to what they say, be true to our voice and make sure every product is as great as we can make it.”